Five banks that put up letters of credit (L/Cs) to guarantee municipal debt issued on behalf of the Pacific Gas and Electric Company (PG&E) may lose US$762 million if the utility is declared bankrupt.

Bankruptcy is looming for the San Francisco based publicly listed utility after it announced in January that it was filing for Chapter 11 Bankruptcy.

Fire damage

PG&E filed for bankruptcy in response to the financial challenges associated with the catastrophic wildfires that occurred in Northern California in 2017 and 2018.

The US utility's announcement that it planned to seek protection from creditors prompted a surge of selling of PG&E's floating-rate securities.

Banks' liability

If new buyers cannot be found then standby L/Cs issued by several banks for a total of up to US$920 million may be drawn upon.

Sumitomo Mitsui Banking, Mizuho Bank, Union Bank, Toronto Dominion Bank and the Canadian Imperial Bank of Commerce provided L/Cs to guarantee about US$762 million of the US$920 million of municipal debt issued on behalf of PG&E.

"Those letters of credit insulate muni holders," said Matt Fabian, a partner at Municipal Market Analytics. "There's no real risk for the muni holders. It's all about the banks."

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.